Why Tanzania faces mounting costs from investment disputes

Dar es Salaam. Legal experts are urging the Tanzanian government to implement stricter accountability measures when negotiating investment deals to prevent costly legal battles.

Their calls come as the government settles a $90 million (approximately Sh237 billion) dispute with Indiana Resources over the Ntaka Hills Nickel Project.

Under the agreement, the government has agreed to pay Indiana Resources and its associated entities, marking the end of nearly seven years of arbitration at the International Centre for Settlement of Investment Disputes (ICSID), a World Bank division.

Indiana Resources, which holds a majority stake in Ntaka Nickel Holdings Ltd (NNHL), Nachingwea UK Ltd (NUKL), and Nachingwea Nickel Ltd (NNL), in a statement issued early on July 29, announced that Tanzania will make the payment in three instalments.

Read: How Tanzania can avoid hefty claims by aggrieved investors

Reacting to the news, a prominent lawyer and director of the Environmental Lawyers Association (Leat), Dr. Lugemeleza Nshala, emphasised the urgent need for a mandatory accountability system for government officials to prevent detrimental contracts for the nation.

“We will continue to pay these compensations due to reckless contracts that are then arbitrarily breached. Officials use their authority to enter into and break contracts, leaving the burden of payments on the citizens,” Dr Nshala stated.

He expressed concern over the lack of accountability mechanisms, suggesting that those responsible for entering or breaking such contracts should face repercussions, possibly including asset forfeiture. Dr. Nshala criticized the current system, which he said makes the President of the United Republic of Tanzania resemble a monarch, and reiterated the need for a new constitution.

The director of the Tanzania Trade and Investment Network (Tatic), Olivia Costa, said while the government’s goal was to protect domestic resources, there is a need to reassess Bilateral Investment Treaties (BITs) to avoid conflicts.

“This is a troubling sign because investors often resist restrictions, and when the government sees that the area allocated to an investor is underutilized, the investor is protected by BITs,” Coasta remarked.

She highlighted the case of Indiana Resources, noting that despite the investor’s lack of initial investment, the government is now compelled to pay billions. Coasta called for a review of these contracts to address restrictive clauses and, where possible, amend them.

An analyst on investment issues, Bubelwa Kaiza, attributed the problem to Tanzanian laws allowing government officials to enter into contracts secretly.

“The laws permit the government to have the authority to enter into contracts confidentially, whereas they should be transparent, involving experts and the Parliament for discussion,” Mr Kaiza said. “Experts should be held accountable if losses occur, and there should be transparency in all contracts.”

Under the terms of the agreement that have been reached between the government and Indiana Resources, the first installment of $35 million has already been received, with $25 million is due on or before October 25, 2024; and the final $30 million is to be paid by March 30, 2025.

Executive chairman Bronwyn Barnes expressed satisfaction with the settlement, highlighting its significance for Indiana Resources.

“I am very pleased to have concluded this settlement on behalf of the Claimants with representatives from the Government of Tanzania,” Barnes said.

“Following the cancellation of our licence for the Ntaka Hill Nickel Project in January 2018, we pressed our claim for compensation. The settlement amount represents over 82 percent of the original award handed down by ICSID in July 2023 and will save the Company considerable time and costs in pursuing further proceedings.”

Barnes said the settlement as a demonstration of Tanzania’s commitment to working with international investors.

She also indicated that if Tanzania defaults on any of the agreed payments, Indiana Resources retains the right to recommence annulment processes or seek enforcement through ICSID.

The ICSID annulment hearing, which took place in Washington, DC on July 26, 2024, will be put on hold pending the completion of the settlement process.

Indiana further said that it will request that the ICSID ad hoc Committee suspend proceedings until Tanzania fulfills its payment obligations.

According to Indiana, should Tanzania fails to meet the payment deadlines, the Claimants can seek to resume annulment proceedings or pursue arbitration under the London Court of International Arbitration Rules.

Confirming the incident, the Attorney General, Dr Eliezer Feleshi said: “It is true”.

Other cases

Last week, another case took a similar trajectory after the International Centre for Investment Dispute Settlement (ICSID) has extended the suspension of proceedings between British real estate developer Pennyroyal Limited, and the government of Tanzania until next year.

The extension, now until January 12, 2025, allows both parties to pursue negotiations for an out-of-court settlement regarding a project based in Zanzibar.

 The case stems from the government’s appropriation of 411 hectares from the developers in Matemwe, Zanzibar, with registration in July 2023 and the tribunal’s initial session held on December 14, 2023.

The specifics of Pennyroyal’s demands remain unclear, although the project was initially valued at $1.6 billion upon completion. If a settlement is reached, it would mark Tanzania’s second out-of-court agreement in less than a year.

 In October 2023, Tanzania settled with Canadian mining company Winshear Gold Corp, paying $30 million (Sh75 billion) following a dispute over the expropriation of its SMP Gold Project in southwest Tanzania, originally seeking over Sh250 billion in compensation.